Let’s Not Raise Minimum Wage. Let’s Abolish It!

minimum wage
Jean-François Millet: Going to Work // Public domain

It is telling that the public almost unquestioningly believes that the minimum wage helps low-income people in particular. But as the prominent Czech economist Robert Holman writes in his textbook on microeconomics, “If economists agree on anything, it is that legislating a minimum wage increases unemployment.” Although the minimum wage is often justified as an effort to encourage the unemployed to work and raise the incomes of the lowest-paid workers, its actual consequences are in stark contrast to these intentions.

Prima facie, it would seem that the introduction or increase in the legal minimum wage would lead to a decrease in the unemployment rate in a given economy, as it encourages the unemployed to look for jobs that are more generously paid thanks to the government’s support measure. Such a view takes into account only labor supply. However, the wage of a worker (i.e. the price of labor) in the free market is determined not only by the supply of labor but also by the demand for it.

In competitive markets, a worker’s nominal wage is approximately equal to the product of their physical marginal product of labor and the price of this output. An employer will only hire a new employee if they expect them to be sufficiently productive for the marginal revenue from the labor to exceed the marginal cost of their employment to the firm.

In principle, the employment relationship is nothing more than a voluntary shift. Specifically, it is one in which one party exchanges its work effort for financial compensation, whereas the other party does exactly the opposite. Like any other exchange that is not entered into in the presence of coercion or other forms of violence by either party to the bargain, it is inherently beneficial to all. Anyone who makes such a trade inevitably benefits from it, otherwise it could not have happened.

Even for those individuals who are not very productive and whose work effort is not particularly beneficial to their employers, it is certainly preferable to work for low wages than not to work at all, thus giving up their main (if not only) source of income (let us now disregard the influence of unemployment benefits and all sorts of other social programs). But alas, it is the minimum wage that makes this impossible!

If the value of the employee’s work to the firm is lower than the expenditure (in the minimum wage) it has to make to employ them, they will simply remain unemployed. If the minimum wage is too high compared to the equilibrium (i.e. market) price of a particular job, workers will not be able to do it, as the firm would lose out.

The main implication is obvious. The least productive or lowest-paid workers, whom the statutory minimum wage was intended to help more than anyone else, will be most harmed by this government measure. Students, migrants, or generally under-skilled workers are involuntarily deprived of the opportunity to work. Yet those who earn several times the minimum wage are hardly affected by this perverse relict of socialist times. The conclusion is therefore clear – the minimum wage is either unnecessary or completely undesirable.

It is not without interest that the strongest advocates of the minimum wage and the fighters for its continuous increase tend to be trade unions. They certainly do not do so out of any benevolent intentions, but purely out of concern that unionized workers could see their high incomes threatened by individuals who settle for lower wages. For example, such Ukrainian migrants willingly working for low wages represent unwelcome competition for them, which they seek to prevent by raising the legal minimum wage.

A rational discussion should be held not about whether (or how much) to raise the minimum wage, but about whether to abolish it altogether. After all, it is reprehensible to prevent those who want to work from doing so when there is also a demand from businesses to employ them. The minimum wage is nothing more than a despicable act of government violence, justified only by ignorance or deliberate denial of the inexorable laws of economics.

Written by Štěpán Drábek – analyst at CETA.

Continue exploring: 

Economic Defence of Advertising

Bulgaria’s New Minimum Wage Mechanism Needs Urgent Repair